Capital Is No Longer Scarce
continuations.com
continuations.com
Basically, we are spending huge amounts of money getting numbed out of our minds instead of solving real fundamental problems.
In general, I think it reveals a deeper problem about capitalism; none of us understand value anymore (we have more junk in our lives than we could possibly need)... So we struggle to allocate capital properly. We just blindly follow trends. The people who are getting rich now are not those who want to make the world a better place; the winners are those who just want to make quick cash (short-term thinkers who take insane risks).
Does society prefer Snapchat or a cure for cancer? In the current economic environment, investors prefer Snapchat because Snapchat is pretty likely to get a ROI within the next 5 years.
The return on investment for a cancer cure is probably small (especially given the large amount of recurring revenue that big pharmaceuticals are currently making by selling cancer drugs). Also, it's much riskier than Snapchat... Could take 5 years, 10 years or 20 years.
Ultimately, we are satisfying people's short-term 'wants' at the expense of their long-term needs. We're a society of addicts who just want to get a quick buzz.
I generally share your concerns, but oncology and the market for donations to cancer-focused charities are surely bigger than Snapchat.
I'm not sure counting unicorns is a good heuristic for importance.
Molecular targets are getting harder to find. Getting a drug through the FDA is insanely difficult, costs huge amounts of money, and often fails. Further, there is significant political risk once you get it through - very few countries will pay full price for your drug (mostly just the US), and who knows where the US is going?
Pharma is both a scientific and a regulatory challenge - making money involves the stars aligning.
If you want more cancer cures, make it easier to become very rich by selling them.
Is this because we've already harvested the low-hanging fruit? Are there any new paradigms on the horizon that could change this?
> If you want more cancer cures, make it easier to become very rich by selling them.
It's an odd thing about Americans, though. They really don't seem to mind if Jobs or Zuckerberg get insanely rich (although there was some grumbling about Gates back in the day), but they loose their collective fecal matter if an evil capitalist with a cure for cancer even tried to recoup the capital invested in its development.
"People are dying because it is not free!", they would screech. And the (US) government would cap the price because by that time they will be the sole domestic channel for any new therapy's delivery and done and done. Big pharma knows this, and if they don't, their investors do. Better off improving female viagra or something.
I.e., if there is already a drug that cures 75% of cancers and a new drug cures 85%, a clinical trial to detect that 10% difference will require a lot more people (and cost a lot more money). Additionally cost-efficiency is not a valid reason to allow a new drug (according to the FDA), you've got to be better than the last one.
That makes sense. Thank you.
> Additionally cost-efficiency is not a valid reason to allow a new drug (according to the FDA), you've got to be better than the last one.
Really? I did not know that. On the face of it, that seems absurd. If Treatment A cures at a 75% rate and costs $1M and Treatment B cures at a 72% rate (worse) and costs $10, it seems as if it would still be valuable to the market, no? Or am I mis-reading you?
This must be a joke. Lipitor generated $125 billion revenue for Pfizer while in patent. A cancer cure will be worth more.
Your reply says nothing about ROI without that information.
Money often functions as a lack of efficiency and is prone to re-produce itself. For example: if cancer was cured with a pill, forever, the total revenue from curing cancer is pill sales price * people born, which would be less than current treatment costs.
Maybe https://en.wikipedia.org/wiki/Gross_National_Happiness isn't such a bad idea.
As for investors preferring Snapchat to curing cancer? The amount of money invested in cancer dwarfs Snapchat's investments by magnitudes. You don't just cure "cancer" you find cures for the hundreds of different diseases that fall under the umbrella of cancer. There's so much money invested in cancer there are often not enough candidates for a new clinical trials.
If we have a shortage of anything, it is medical research scientists. And the way to get more of those is to change the regulations so there is more room for profit medical research.
Capitalism seems better than past failures. But it is surely a local maximum. We have thousands of years of social evolution in front of us. Experiments have hardly been exhaustive, and material conditions seem to be changing faster than ever.
And transparency can be abused by selective quoting by those with agenda see the UK's MP expenses scandal and who owned the news paper that broke it.
The Reformation began for good reasons -- the Church had been dragging its feet on internal reforms for hundreds of years, and finally implemented these reforms in the Council of Trent, after the Reformation began -- but its spread was normally something that governments did to their people, not something that people chose for themselves. It wasn't an extension of liberty. Henry VIII and Edward VI flooded England with mercenaries, for example; in the Germanies, whether to turn Protestant or not was a decision made by rulers (who were legally entitled to compel their subjects to follow them; some converted to Lutheranism, seized Church property, and then switched back to Catholicism, and persecuted subjects who were slow to make the change each time). First-wave Protestants -- Lutherans and Anglicans -- generally had less religion rather than a different religion; even today, there are conservative branches of the Lutherans and Anglicans who are negotiating with the Catholic Church to return as whole congregations.
Calvinism was (if I remember rightly) never imposed from the top down, and typically took power through revolts by the middle class or the lower aristocracy; but Calvinist states tended to be oppressive, warlike, aggressively-middle-class theocracies -- very bad places to be poor or dissident. (_Albion's Seed_ is revealing on this; the modern Islamic Republic of Iran is a less theocratic, less anti-commercial, less oppressive place than 17th-century Puritan Massachusetts was.)
The problem with formal systems of accountability is that it ends up serving storytelling rather than being calibrated regulation and control.
There's also an information problem.
I feel like somehow biasing towards nonfiction is one way to improve this, but that may just be bias speaking.
We can't be all that coherent about "greed" anyway - if we do create consumer surplus through business, then this is a good thing. If we enrich ourselves by rent-seeking and cheating, it is a not. Deciding which is which is pretty hard.
I'm sorry the situation is so bad in research, but it does produce miracles.
But it is just one case.
My friend, a Ph.D. with 100+ publications in cancer research told me recently there has not been much progress in the last 30 years.
The caveat is that we are training more than enough research scientists, but we simply don't have enough jobs for them. There are some jobs in industry, but biology is not like engineering-you can't know when you will find the next breakthrough. Pharma companies are more focused on iterating on established pathways and targets (much lower risk and higher short-term ROI) and are absolutely dependent with government-funded basic research.
The clinical trials bit that you mentioned is a red herring-recruiting patients is often challenging for completely unrelated issues. I've also never heard of being unable to conduct a clinical trial for lack of patients.
https://news.ycombinator.com/item?id=10686732
I think two big contributing factors are the so called "active investors" and corporate taxes.
Active investors force companies to optimize for short term gain which of course hurts growth.
Corporate taxes are too low. The private sector is not generating enough growth and to fix that the government does the exact opposite of what it should do. It hands the private sector more capital instead of taking it away. The private sector is already at a loss with the capital it already has at its deposition. I bet most of it goes into speculative Wall Street financial vehicles and I do not think any of it ever gets to entities that are short on capital or it goes to the wrong entities that are short on capital because most academics would be more than happy to get 0.01% of the capital that goes to social media startups.
[0] http://www.scientificamerican.com/article/we-now-have-the-cu...
[edit] I would also like to add, the non-profit approach [IMO] has failed to produce anything but the abundance of the color pink and self congratulatory galas for wealthy donors. Perhaps the profit motive and choice that has served society so well in practically all aspects of our lives can be equally leveraged on solving hard problems like disease.
That would depend on how much it cost them to develop the treatment, and how much money the patients can pay. It's not sure that it would be profitable.
A little girl and her grandfather, an economist, are walking down the street. Suddenly, the little girl tugs on her grandfather's tweed blazer and says, "Look, Grandpa! There's a $20 bill on the sidewalk! Somebody must have dropped it!"
"Nonsense!," said the grandfather. "If that were a real $20 bill, someone would have already picked it up!"
You would have to look at all the businesses funded and see where the money is going. Also I would caution you about falling into the trap of confusing "valuation" with "capital". SnapChat might have had a $16B valuation but really only "allocated" a bit more than a billion dollars.
If you subscribe to the 'too much money is idle' point of view like continuations does, then you should be very bullish on the startup eco-system growing for all kinds of businesses, and that gives the capital a chance to be allocated to something useful, like another Watsi.
PS: Some people get rich at Vegas, that does not mean gambling is a good investment.
Now, looking ahead you don't know what the risks are. But, you can examine the ROI for 1990 investments and you can see which 2010 investments have already failed.
My point is that your standard has to be for your choices of the capital today versus historical returns. So if you compute for expected value of a million dollars sitting in a bond fund today, versus sitting in a basket of startups, are the returns less in the latter case?
As to solid returns today, regulated public utilities companies have ok returns and low risks. It's not zero risks and the upside is limited, but many people consider them the benchmark for low to moderate risk investments. (Though you still need due diligence as leverage can still kill them.)
Effectively zero risk investments on the other hand have a huge price premium.
I think some of these overvalued... frankly, Pet Rock companies aid and abet this. Don't get me wrong, WE are the problem here but the effects are not good.
The current economy supports a large number of those. And they provide steady employment for a large number of people. But often times in this forum (HN) companies providing jobs which are considered "CRUD" are not held in high esteem and so you don't hear about them. So perceptions can be biased as well.
I worry more about non-allocation when you can't get credit from banks and you companies sit on giant hordes of cash. That slows the economy down and makes it hard for new experiemental companies to get going.
There is absolutely nothing wrong with CRUD. It's all CRUD to an extent.
To your last sentence - yep.
Things That Matter are more or less on autopilot - see "How It's Made". So the differentiator becomes rent-seeking in nature. This makes things volatile - how is there anything like a "fundamental" to Snapchat - and this increases uncertainty. But “All of humanity's problems stem from man's inability to sit quietly in a room alone.” - B. Pascal.
Preferences are real and we don't understand them ( in the sense of "I cannot understand myself" in Zen). But we can certainly see their aggregated effect.
and in a way, it's worse even than that - cure cancer. Now something else comes along to replace it. Maybe that's Alzheimers. Cure Alzheimer's? Something else.
Their value is generally high because the output of a small number of individuals has an impact on a very large number of people. In addition to the services they provide directly, they usually create secondary benefits for society such as releasing new technologies into the open source community.
If you want to tackle waste, you'd be better off by looking into non-profits. How many funnel a significant portion of their funding into 'administrative costs'? How many exist to dodge corporate taxes in the name of 'good will'? How many are thinly-veiled advertising agencies for political special interest groups? How many aim to provide value to the greater populace rather than a very small subset of the population?
What about religion? Not banging on people who follow any specific religion, but nobody ever asks just how much value they're capable of extracting from their followers. How much of that funding goes to providing non-religious services such as entertainment, or backdooring funding to political special interests that support their own worldview.
How about subsidizing post-secondary education that abuses pricing as an entry barrier to exclusivity? Why have degrees become a default requirement for most/all middle class jobs? Why the hell does it still follow a strict 4-year rule for undergrad degrees? Why does everybody still waste the first 2 years learning arbitrary 'core requirements' unrelated to their specialty? How can we realistically subscribe to a fire-and-forget model that assumes everything can be taught up front prior to a lifetime of work. The 'waterfall' model has been proven ineffective in technology, why is it still overwhelmingly supported in education?
I live in San Diego, a hub for biotech research companies. From what I've seen talking to people who work in the field, funding isn't the issue. If anything, there's already too much capital floating around and the larger companies are swallowing the smaller companies en masse to eliminate competition.
I personally knew a guy who works in bleeding-edge cancer research. New advances won't come in the form of a pill or operation. The next generation of treatments hack biology in a way that makes cancer visible to the host's immune system. In addition, cancer is a blanket term to label a class of diseases so one treatment will only treat one/few forms of cancer. Throwing more money at the problem is like trying to hasten software development by throwing more developers at a project.
ROI for healthcare is huge, especially now that insurance is mandatory and basically charged as a 'tax for being alive'. The cost for Snapchat is minimal/nothing whereas healthcare via insurance + medicare/medicate costs make up a significant percentage of individual income.
High frequency trading is this, but with very high speeds and lots of competition. This means they have to exert value out of almost infinitesimal price changes.
>As HFT strategies become more widely used, it can be more difficult to deploy them profitably. According to an estimate from Frederi Viens of Purdue University, profits from HFT in the U.S. has been declining from an estimated peak of $5bn in 2009, to about $1.25bn in 2012.
That's 0,007% of U.S. GDP. And probably going down.
>"DEFINITION OF HFT: 1. a strategy which trades for investment horizons of less than one day 2. a strategy which seeks to unwind all positions before the end of each trading day thus HFTs can't deploy large amounts of capital"
There are heaps of evidence HFT ruins markets, economies and nations, so I call BS.
http://www.zerohedge.com/news/2015-03-20/how-hft-destroys-ma...
HFT firms are not that big; the ones I've seen pointed as the largest have net incomes of less than $100M. Why wouldn't the other market participants, particularly the largest Wall Street firms, allow HFTs to ruin their game? The link you posted mentions "corrupt SEC regulators", but why would they be corrupt in favour of HFTs?
To push the analogy, sometimes the rhino gets annoyed and pecked too hard, but overall it's happy to live without as many bugs everywhere.
>links to zerohedge
credibility = destroyed
You could also look at the book, Flash Boy's Not So Fast, which takes apart, page by page, all the arguments in the book, Flash Boys
http://www.amazon.in/Flash-Boys-Insiders-Perspective-High-Fr...
Also, my own experience working on a trade floor as a source.
You could have explained me why HFC is bad. Just slamming around some link with lots of "evidence" is not very convincing. Given how easy it is to find evidence about anything these days. It's bit unfair to assume I should gather your argument for you.
Furthermore, many of the issues described there are fairly innocuous in reality.
For example, flickering (aka "quote stuffing") is a software bug which costs HFTs money: http://zacharydavid.com/2014/04/on-hft-part-ii-bugs-features... https://www.chrisstucchio.com/blog/2014/quote_stuffing_is_a_...
The issue of HFT being a zero sum game in the race for latency is predominantly caused by the subpenny rule: https://www.chrisstucchio.com/blog/2012/hft_whats_broken.htm...
HFT itself isn't "bad", period.
Does it have bad actors, stupidity, corruption, inefficiencies and is sometimes a waste? Yes. What industry is immune to this?
HFT firms make money by being the first to grab trades for tiny price deltas. If the law said trades could only execute on one-second intervals, the deadline to be first to grab a trade would become a tempo defined by human law, instead of a steady lag due to physical law. But there would still be a deadline, so companies would still race.
1. That's a valuable evening out prices may be a valuable function, but one reason HFT gets shat on is because of the enormous effort put into attempts to arbirage over shorter and shorter time intervals. How does society actually benefit if the prices are equalized over a 1ms interval vs a 1s interval?
2. There are other, more parasitic HFT strategies than arbitrage. One I read about consists of the HFTs putting small tripwire sell orders on some exchanges to detect buy activity, then front running big orders by buying up all the stock on other exchanges and offering it at a higher price. The HFT performs no function besides inserting themselves as a middleman. It's like being on Amazon, clicking buy on a $10 item from seller A, then either having your order fail or be filled by seller B (who themselves just bought from seller A) at a higher price.
It also sounds like the term front running refers to many different practices, this is from the Wikipedia article:
> One common practice of high-frequency traders (HFT) is a form of front running, where they peer into various exchanges and try to detect orders as they propagate from a broker's order router.
> HFT traders place many small orders that indicate buying/selling pressure. Those with the shortest lag in reaching other exchanges then place orders on those exchanges to catch the rest of the order, at a more advantageous price.[6] According to Harvard Political Review writer Austin Tymins, HFT hedge fund Citadel LLC made billions of dollars front-running the trades of large institutional investors, many of which are investing on behalf of middle-class clients.[7]
http://www.amazon.com/Flash-Boys-Insiders-Perspective-High-F...
You'd have to do a _lot_ of buying on other other exchanges to move exhaust the order book to the point that you can make a profit, and there is no way of knowing that the "buy activity" that your "tripwire" detects is, in fact, a harbinger of larger orders on the way to other exchanges. It could just be a single buy order at your tripwire exchange. You have no way of knowing.
Read "Flash Boys: Not so Fast" for a highy detailed rebuttal of Flash Boys. It's written by an HFT trader, so it's not intending to be unbiased, but from a logical perspective it does seem to demolish Lewis's points.
http://www.amazon.com/Flash-Boys-Insiders-Perspective-High-F...
They consume liquidity by identifying that one individual is willing to buy at $10.02 at point A and one who is willing to sell at $10.00 at point B. These individuals would discover each other naturally in (literally) the blink of an eye; but HFTs pay to colo everywhere, they pay for 40Gb connects and ASICs. They pay for the fastest possible connections between those colos.
This means that instead of those individuals who truly create liquidity and who truly drive the market finding each other; the HFTs are able to wedge themselves into the middle of the transactions. This works because the NBBO system is slower than their systems. It works because of complex order types that benefit only HFTs (no actual investor requires a hide not slide... that's just a tool for HFTs to cut the line).
HFT does not create liquidity. It does not even out price differences. It is an entirely predatory tool to extract value that was generated by other, better men.
HFT is a place where self-righteous nerds pick everyone's pockets.
HFT is useless trash.
The only place I agree with you is that HFT-based theft, like car radio theft, is a relatively minor crime and one that is declining over time.
True market making is often algorithmic and automated, and it operates quickly. But it is completely different from the nonsense that is HFT.
I'll never understand this line of reasoning. It's completely backwards. Does anyone really think it'd be so easy to borrow money for consumer goods with suspect credit or outlandish business ideas without central banks pumping liquidity into the economy? Anyone looked into savings rates lately? You know, where natural capital formation occurs?
The same as what's happening now? Sure, then blame the Fed.
Something dramatically different? Then maybe there's something else going on, and the Fed is merely responding to that.
While this is semantically true, reducing taxes as a vehicle to put money in the right hands is by all means a subsidy.
> That being said, labor and capital should be taxed at the same rate, there being no reason to distinguish them for tax purposes.
At least in the US system, there are two main distinctions made (there are some others, too, but these are the biggies) between labor and capital income, and both have some logic though better options, I think, exist.
(1) Between labor income and all other income (including, but not limited to, capital) -- labor income alone is treated as qualifying for certain social safety net program eligibility and benefits calculations (Social Security and Medicare), and is therefore subject supplemental taxes to fund those benefits. Alternative: make all income qualifying for those programs, and tax all income to fund them.
(2) Between long-term capital gains and most other income (including both short-term capital gains, labor, and other taxable income sources). Because the former are earned over a period of greater than one year, in a system with progressive marginal taxation on annual income, taxing them the same as the latter with no mechanism for accounting for the period over which they were earned -- especially when they are returns earned by sale of holding that aren't regularly repeatable, rather than sales of small subsets of a large pool of assets structured so that long-term gains can be extracted every year -- results in overtaxation when compared to regularly repeatable income streams like labor income. Alternative: tax all income equally, but allow taxpayers unlimited freedom to recognize (and pay taxes on) income in advance of realization, and limited -- but some -- freedom to defer recognition and taxation of some portion of windfall income for a period of years after realization. (This stops long-term capital gains from being a dodge to get low taxes on repeatable income from large holdings, while not unfairly taxing non-repeatable long-term gains, and also more fairly treating irregular labor income.)
For me this is amusing in a way since I work in financial services as a developer. So if/when that shoe drops my job is first to go for sure. Oh joy!
Otherwise, the mere existence of that money (even if it never gets spent) serves no other purpose than to reinforce the status-quo.
In many ways this is akin to a mathematical singularity where all economic models break down. Can't tax it out of the economy or deficit spend it, both will cause misallocations from the speculative markets as they'll assume the dead money has worth which incentivizes them to spend it which again devalues existing capital invested which causes the markets to collapse. So, what to do? I assume at this point we're heading into a situation that's similar to a post-scarcity economy, so it's inevitable that prices will have to collapse whether we want them to or not. And that means certain norms such as property rights go away (along with the State institutions that prop it up). We'll get a Star Trek future, but only after the Mad Max nightmare between now and then is my guess (purely speculative and not of substance imo).
How much was the "global investible capital" in the 1980's and in the WWII ? What about the Global GDP ?
Contrast that to the post-WWII years: you had an increasing population and a huge demand for new infrastructure. The Cold War space race was also a huge technological boost.
- Having said that the financial people I speak to seem to be swimming in capital. They all seem to want someone to trade it for them, or find deals to put the money in. On the other side, it's probably never been easier to get capital for certain kinds of project, but not every project qualifies as investible due to a certain kind of bureaucratic conservatism (old fashioned CYA requirements, lack of imagination, and so on). In particular stuff that banks are retreating from is leaving a big gap in the market.
- He makes a good point that when you get smarter about using capital, you need less of it. Perhaps that's where the missing productivity went?
Also, how does one add up the values of financial instruments? The capital he's referring to includes stocks, bonds and loans. What if I take a loan so that I might buy some bonds?
Lastly, not all assets are traded in each period, and some might never be sold, such that their values cannot be observed in financial markets.
"Capital is no longer scarce" sounds very absurd. There will always be more people chasing limited resources and whenever less men (labor) are required for a task, the society directs that "capital" to either arts or research
Of course. There is not infinite value in existence, nor is there a means of creating value from nothing.
> If investors think you're product is going to be profitable, you're virtually guaranteed to get funding.
Well... this is always the case. The only difference is that as capital is more scarce, potential investors are more critical in their analysis of the product's potential.
> Lots of capital doesn't mean investors are going to throw money at losing propositions.
Right. As available capital approaches infinity, the expected ROI of ventures which obtain successful funding approaches zero.
This is an oversimplification of course - if an asset is deflationary, the limit is the rate at which the asset gains value; if an asset is inflationary, the limit is the rate at which the asset loses value (i.e., a negative rate). The mechanic holds true, though.
1. A corporation is a living organism (ie in the abstract, not biological sense) that needs to be fed to survive.
In a system where resources are scarce (ie there's a hard limit on how much that can be extracted from the market), dominated by organisms that are expected to grow indefinitely or die; eventually one of three things are going to happen.
First, the market becomes completely saturated, the organism quits growing, capital is devalued, and the organism suffers a slow/painful death at great cost to the stakeholders.
Second, the organism diversifies and grows in size/power beyond the limits of the market so it starts consuming other organisms and/or artificially raises prices to extract more value at the current expense. Ie asset inflation which acts as a hidden tax on the entire ecosystem.
Third, the organization buys back the its shares, converts to a private company, and adjusts operations in a manner that emphasizes long-term sustainability over growth. This almost never happens 'in the wild' and never happens in the interest of 'sustainability'. Offering to buy off the existing stakeholders without uncontested majority voting rights is the same as handing them a blank check. A realistic 'best case' is that the value-producing stakeholders fork off and create a new private company.
People seem to be shocked that large companies act in an amoral manner. I'd be shocked to see a corporation continue to act in a moral manner after growing to sufficient size. Just try to see the corporation as a living organism. In terms of life-or-death decisions, survival is paramount to morality every time.
What's worse, when an organization grows sufficiently large enough to challenge/undermine the authority of governments. They can stimulate changes in government policy via corruption, park/move capital/operations to locations lacking restrictions, purchase large quantities of government debt and profit from the shortfall of the system that they've been actively starving of resources.
Capitalism is an amazingly successful model for fast-paced growth but self-defeating in terms of long-term (read multi-generation) sustainability.
2. In pure capitalistic terms, people are assets.
What happens when a market becomes diluted with more assets than demand can justify? The value of those assets goes down.
By virtue of competitiveness, companies will always strive for efficiency. To produce more value with less. It's a basic fact that with increases advances in technology, it requires fewer people to maintain and/or increase the current standard of living.
High-earning capitalists perceive themselves as winners of the race, and rightly so. Unfortunately, the greater their ratio of success the greater that success taxes the sustainability of the wider ecosystem.
In an ecosystem of scarcity we can either have fewer people with a higher median standard of living operating at a higher level of efficiency, a greater population living at a lower median standard of living, or a mix of the two where efficient producers are incentivized with special privilege to subsidize the non-contributing existence of the rest.
Either way, we're approaching an upper limit to the quantity of useless shit we can realistically expect people to willingly consume. Capital is being concentrated at an ever-increasing rate and it's being used to purchase assets at artificially inflated values and charge high rates for access.
In California specifically. Capital is being parked in 'investment properties', in many cases by foreign investors. Ever increasing rent rates are being leveraged to extract more from the working class. The people responsible for purchasing the most goods/services have less to spend. Even people who make double the national median income struggle to afford rent and have zero prospects of purchasing in the near and long term. Companies that produce goods suffer as their consumer base is starved. The cycle of capital concentration continues.